Taxable Investments: The Best Opportunities Now

August 6, 2008

A good long-term investment plan does not change very often, but short-term cash and extra funds that you can dedicate to speculative opportunities should be constantly reevaluated.  The current markets present an extraordinary opportunity every individual should review.

If you are in a high tax bracket, tax-exempt bonds have historically offered a slightly better after-tax return than comparable taxable investments.  Over the last year, due to the liquidity crisis in the financial sector, tax-exempt bonds, a.k.a. municipal bonds or “munis,” have become extremely undervalued.  They now offer nominal returns that are roughly the same as taxable equivalents, which means that if you are in a high tax bracket you will end up with a lot more money if you put it in munis.

Clouding the situation has been the fact that bond rating agencies have historically put municipal bonds on a separate but identically named risk scale.  The Wall Street Journal notes, “[I]nvestment-grade corporate bonds between 1970 and 2000 had a 10-year default rate of about 2.3%, far higher than the 0.03% default rate of investment-grade munis.”  I.e., the finance industry has historically pretended that munis are as risky as taxable bonds that in actuality have proven to be seven times more risky.

Munis are not without risk.  Municipal institutions can default on their bonds, and they will be more likely to do so during a recession.  Also, muni bonds are exposed to the same price risks as most other bonds: Their value will decline if interest rates or inflation rise above the levels currently anticipated by the market.  Nevertheless, the risk level of investment-grade bonds is considerably lower than that of stocks or real estate.

First Action Item: If you are in a high tax bracket, this is definitely the time to move any non-retirement assets that you would normally invest in bonds into muni bond funds.  Your after-tax risk-adjusted earnings will be far higher with the munis.  Examples of good funds are Vanguard’s VWLTX, or USAA’s USSTX.

This is also a good time to consider a speculative angle on munis: Not only are they underpriced relative to taxable bonds, but they are also close to “support” levels where even non-taxable entities would start to buy them.  As soon as their nominal yields exceed those of comparable taxable bonds they will be bought by large investors that don’t benefit from the tax exemption — pension funds, endowments, etc.  I.e., they are below their historical and intrinsic price (which is the price a high-tax-bracket investor would pay to own them), and they are so low that they cannot fall much further relative to taxable fixed income.

Buying large amounts of municipal bonds with taxable funds could produce not only an attractive current yield, but also significant capital gains if they revert to their historical price levels relative to taxable bonds.  The best way to speculate on this dislocation is with leverage, and it turns out to be easy to leverage exposure to municipal bonds using Closed-End Funds (CEFs).  A typical leveraged muni CEF will employ leverage of 30% — which means you get roughly 30% more dividends and 30% more exposure to price swings than you would have from a conventional muni fund.  There are literally hundreds of CEFs in the municipal bond sector.  I look for high-yielding CEFs that are trading at a discount to their historical discount.  (There are a number of reasons why CEFs trade at a permium or discount to their NAV.  Without getting into those nuances just follow the rule-of-thumb that the practical “discount” for a CEF is defined with respect to its historical discount.  I.e., you’re getting a bargain if you buy a CEF at a discount to its discount.  Visit ETFConnect to look at the historical discount for any CEF.)

Second Action Item: This is a great time to speculate on munis using leverage.  Just realize that like all speculative strategies this is subject to greater risks: I.e., you can lose more money if things go wrong.  If you have speculative capital to put to work, look for a high-yielding muni CEF that is trading at a discount to its historical discount (I consider the average 52-week discount for this purpose).  Current examples would be:

  • BFK (6.5% current dividend yield, and trading at a 6% discount to average discount)
  • MVF (6.2% current dividend yield, and trading at a 3% discount to average discount)
  • NZF (6% current dividend yield, and trading at a 2% discount to average discount)

CMC AR-15 Super Match Trigger Group

August 5, 2008

A typical AR-15 does not have a good trigger: My Bushmaster’s factory trigger is heavy and not particularly crisp.  I finally broke down and bought a single-stage Chip McCormick trigger group for $176.  The advantage of this over other match triggers designed for AR-15’s is that it’s a single rugged unit, easy to install, with a 3.5-pound pull that breaks like glass.  Drawback compared to its competitors is that it is not in any way adjustable.


Reasonable and Customary Charges

February 24, 2008

The American healthcare industry is carrying on a ridiculous scam: They do everything possible to obscure their prices, and then try to bill astronomical fees for services.  Anyone who has medical insurance should be amused when they see every single bill reduced by their insurer by factors ranging from three to as much as ten.  (I.e., the doctor may bill $100 for a service but agree to accept a payment of just $10 from the insurer.)  In most cases this final payment amount is known in the industry as the “reasonable and customary fee.”  And even if you don’t have insurance you should not have to pay more than that.

If you ever buy medical services without insurance, make it clear ahead of time that you will pay only “reasonable and customary fees.”  Of course your first bill will probably be for the inflated amount, not the reasonable and customary amount.  I don’t know of a realiable public source for these.  I have always had some insurance, and even when it didn’t cover a particular service I have been able to call my insurer and ask them what the reasonable and customary fee should be.  They must have a secret catalog they all share.  Because I send that amount in along with a note saying I’m only paying reasonable and customary fees, and that has always been the end of the matter.

If you don’t have access to an insurer, and the billing office isn’t forthcoming with the reasonable and customary amounts, you might try contacting one of the numerous government agencies who have become involved in healthcare to ask what they expect to pay.

And this doesn’t just apply to healthcare:  I have also learned that there are industry standard fees for automotive repairs — another area where lack of information can result in bills that are many times larger than they need to be.  Here owning an extended warranty can save you the trouble of finding and applying the standard fees.  Otherwise you need to appeal to someone with access to the industry’s “Labor Time Standards” manuals, which set out the amount of time that a mechanic should reasonably bill for every conceivable service.

The value of this billing expertise is, incidentally, why I buy extended warranties for all of the cars that I keep past the manufacturer’s base warranty.  Of course, extended warranties are often an enormous profit center, so I bargain aggressively to get them near wholesale cost.


Buy a Car with CarBargains

January 31, 2008

CarBargains is a service offered by the non-profit Consumers Checkbook.  (Checkbook itself is a less political variant of Consumer’s Union, publisher of Consumer Reports.)  For $160 (plus $30 for a subscription to Checkbook if you don’t have one) CarBargains will do the thorough comparison shopping that every new car buyer should be doing himself.

Unless you are an aggressively objective shopper, you should absolutely spend this money before completing a new car purchase.  It could easily pay for itself just in the savings you will realize on dealer-installed options.

I recently tried the service for a relative.  On my recommendation he test-drove an Acura TL and afterwards allowed a cursory discussion of price with the dealer, who said that his best price would be $700 above invoice (and that even employees pay $500 above invoice).  Then we sent away for the CarBargains report.  One week later a report arrived with detailed, binding quotes from ten separate dealers in the New York Metro area.  The report also noted two dealerships that had declined to bid.  The dealer he had talked to earlier offered it at invoice, as did several other dealers.

The report eliminated all of the gaming involved in buying a car — including obscure document and advertising fees that tend to pop-up at the last minute.  CarBargains ensures that you pay a “fair” price for a new car, and that the dealer who most wants to sell it to you can get your business.


Sedan: Acura TL

January 31, 2008

The 2008 Acura TL is the finest production front-wheel-drive sedan on the market.  Perhaps because the platform is due for a redesign next year, dealers are letting them go at manufacturer invoice — which also makes this the best bargain in premium sedans right now.

The base model is sporty and has been admirably tuned to handle like the best German cars.  The Type-S is an even sportier trim with a more powerful engine and tighter suspension.  The trade-off in upgrading to the Type-S is a slightly harsher ride, heavier steering, and heavily bolstered seats that may not appeal to all drivers.  (The steering weight may be a consequence of the amount of torque the 3.5-liter engine puts out: Barring some new torque-steer countermeasure both of these cars are at the upper limit of the amount of power that can be sent through steering wheels.)

As is the custom, Acura offers very few options.  In the base model you should definitely pay for the navigation system (which is included on all Type-S variants).  With a 7″ touch screen, voice controls, and XM real-time traffic, this is the finest navigation system available on any car.

Although its shifting program is among the smoothest and most responsive I have experienced, the TL automatic transmission has only 5 forward ratios.   (This will almost surely be increased in the next design.)  Nevertheless, those ratios span a good range, giving it excellent mileage at (real) freeway speeds and still keeping ample torque on tap at all speeds.


Online Hosting: 1and1.com

November 22, 2007

Online hosting is a crowded market.  For over four years I have used 1and1.com and have found their services to be competent, reliable, and very competitively priced.  There are probably other players out there that are just as good, but with so many questionable businesses in the mix it’s hard to be sure.

I cringe every time I hear of somebody paying $35/year for domain name registration when they can get full-service registration with privacy on an ongoing basis at 1and1.com for $7/year.  Nobody should buy web services before comparing with 1and1.com.


Don’t Send Flowers, Send SpaFinder

November 19, 2007

Paying for delivery of fresh flowers is a woefully expensive gesture, especially considering what you could send instead for $50-$100.  I have yet to find a woman who wouldn’t rather receive a SpaFinder.com certificate in the same amount.  Pick one up at Costco and you can get her a $100 credit for only $80.